Banking Survey 2009Innovation Perspectives
CONTENTSPreface                                           01Executive Summary                                 03Challenges...
PrefaceAlthough the Indian banking industry is nearly two hundred years old, it is only sincethe last fifteen years that i...
PrefaceIn this milieu, it is a significant challenge for Indian banks to sustain growth andprofitability. They will have t...
Executive SummaryThis report takes a strategic view of innovation in Indian banking, with insights fromtop industry execut...
Challenges for Indian Banks:View from the TopAlthough the banking sector is all set tofuel economic growth in the years to...
earn revenues. Needlessly to say, they                    ALBERT TAROU                 will be adversely impacted if custo...
the government will adversely impactliquidity and the quality of credit.”                               YOGESH AGARWAL    ...
For many public sector banks, with a                  friendlier with the spectrum of clientelediverse customer base spann...
Innovation in the Contextof BankingWithin the business context, innovation            ones to offer certain products andtr...
`sweep in’ facility whereby funds           •   Kotak Mahindra Bank allowsexceeding a pre-specified amount were           ...
we spoke to are emulating this model to       New Channelspenetrate rural markets.                                        ...
Innovation StrategyA whopping 96 percent of our respondents          systems and processes to enhancesaid that their banks...
and rural markets. Their strategy              Not all banks have a strategy outlinedentails deploying technology to penet...
practices as well. A majority of these      new customers across the counter.banks have strong domestic operations       I...
Strategic Vs. IncrementalInnovation                                                organizational structure. The exercise ...
•   Bank of Baroda undertook an              the opinion that a series of incremental    organization-wide Business Proces...
Innovation and Efficiency                                                How Important is Innovation for Efficiency       ...
“First Time Right” (FTR). Focused                enable online real-time tracking. Toolsmeasurement and management of FTR ...
On the operational process redesign front, 17 percent said the level of activity in theirbanks was very high and 65 percen...
Innovation for GrowthIn any competitive environment, customer         was extremely important, 31 percentacquisition and g...
have set up business verticals to provide                                             best-in-class services and products ...
and grow the overall business. He believes    Customers are presented with biometricthat it could also facilitate cross-sa...
Products, CustomerExperience and CollaborationIndian banks are realizing that                     Technology transformatio...
Banking customers are wide and varied,          constituent of a broad consumer segment.and so are their financial needs. ...
Interesting views were expressed by                                               When Innovating with Customer Relationsh...
By leveraging the collective wisdom,                                                   investment came next, followed byte...
Respondents were largely univocal in         It is also important, according to severalstating that bringing in the innova...
The Role of IT in Innovation                                           in processes, product delivery, cost               ...
advanced users of IT, felt that IT was v             the respondents said that IT impactedery important for innovation.   ...
place with 12 percent of the respondents    incremental benefits when deployed withsaying that it would have considerable ...
How Banks Can BecomeMore InnovativeIf innovation is to drive efficiency, growth   Is Innovation a Top Priority forand diff...
Setting Out a Clear Innovation Strategy                                       96%        100%                             ...
Creating a Department Responsible for Driving Innovation        80%         60%                                           ...
given as cash incentives in some cases,         specific training could be provided to makein kind in others, and as recog...
ConclusionThe Indian banking sector is poised to welcome innovation from across avenues in the yearsto come. Private secto...
About UsThe Economic Times, launched in 1961, is India’s largest financial daily newspaper and theworlds second largest fi...
Banking Survey 2009_Innovation Perspectives
Banking Survey 2009_Innovation Perspectives
Banking Survey 2009_Innovation Perspectives
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Banking Survey 2009_Innovation Perspectives

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Although the Indian banking industry is nearly two hundred years old, it is only since
the last fifteen years that it has witnessed radical transformation of internal operations as well as products and services. Two significant developments have influenced the functioning of the industry. The first occurred in 1969 when the Indian government
nationalized a large number of banks, forcing them to look beyond urban markets
and initiate operations in the rural sectors. The next big move came in the 1990s in
the form of deregulation, which led to the birth of new generation private banks on
the heels of foreign institutions that had been permitted entry through relaxation of
FDI norms. These paved the way for an era of intense competition and technology-led
transformation within the industry. New entrants leveraged a combination of people, processes and technology to transform the way products and services were delivered to their customers.

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Banking Survey 2009_Innovation Perspectives

  1. 1. Banking Survey 2009Innovation Perspectives
  2. 2. CONTENTSPreface 01Executive Summary 03Challenges for Indian Banks: View from the Top 04Innovation in the Context of Banking 08Innovation Strategy 11Strategic Vs. Incremental Innovation 14Innovation and Efficiency 16Innovation for Growth 19Products, Customer Experience and Collaboration 22The Role of IT in Innovation 27How Banks Can Become More Innovative 30Conclusion 34About Us 35
  3. 3. PrefaceAlthough the Indian banking industry is nearly two hundred years old, it is only sincethe last fifteen years that it has witnessed radical transformation of internal operationsas well as products and services. Two significant developments have influenced thefunctioning of the industry. The first occurred in 1969 when the Indian governmentnationalized a large number of banks, forcing them to look beyond urban marketsand initiate operations in the rural sectors. The next big move came in the 1990s inthe form of deregulation, which led to the birth of new generation private banks onthe heels of foreign institutions that had been permitted entry through relaxation ofFDI norms. These paved the way for an era of intense competition and technology-ledtransformation within the industry. New entrants leveraged a combination of people,processes and technology to transform the way products and services were deliveredto their customers.This phase was marked by a slew of innovations, especially in the retail space asbanks automated their processes, created new channels, built ATM networks anddelivered services at their customers’ doorstep in both urban and semi-urban areas.While private sector and foreign banks led the transformation in its early stages,public sector banks followed suit by deploying core banking platforms that connectedtheir numerous branches and allowed them to offer competitive products. Over thenext few years, the Non Performing Assets (NPAs) of banks decreased marginally asthey targeted new business fuelled by a growing economy and rising urbanmiddle-class income levels. Today, nearly every large bank leverages technology tooffer Internet banking services and, in several cases, mobile banking as well. Banksare also augmenting their traditional offerings with non-banking products likeinsurance, besides exploring emerging opportunities such as micro-banking.The last few years have been challenging for the banking industry which haswitnessed both significant competition and consolidation. An evolving regulatoryframework has added to the pressure by way of stricter compliance mandates. Andit is needless to point out the extent of the impact of the economic downturn on theindustry. The Planning Commission’s draft document of the 10th Plan forecasts alikely deceleration in the pace of expansion of banks’ balance-sheets. The combinedassets of all scheduled commercial banks are estimated to touch Rs 40,90,000 croresby end-March 2010. That will be about 65 percent of GDP at current market pricesas compared to 67 percent in 2002-03. The annual composite growth rate of bankingassets is expected to slow to 13.4 percent during the rest of the decade from the 16.7percent level that prevailed between 1994-95 and 2002-03. The report also predictslarge additions to the capital base and reserves on the liability side. 1
  4. 4. PrefaceIn this milieu, it is a significant challenge for Indian banks to sustain growth andprofitability. They will have to innovate to enhance process efficiency, optimizecosts, rejuvenate products, add channels and improve customer experience toremain competitive.The Economic Times and Finacle from Infosys are pleased to present this exhaustivereport on Innovation in Indian Banking, based on a detail study. The objective of thisstudy is to provide insights into the key challenges and opportunities before Indian banksand the way in which they plan to overcome the former and leverage the latter. Moreimportantly, the report presents senior managements’ perception of innovation and theirvision for translating that into innovative processes, products, channels and customerexperience. The study showcases perspectives from 70 C-level executives across 33leading banks in India. 43 percent of the banks covered are public sector banks, while 36per cent are private sector banks. Foreign banks and other institutions such ascooperative banks and regional banks account for 9 percent and 12 percent respectively. Banks by Category Others, 12% Public Sector Foreign Banks, 43% Banks, 9% Private Sector Banks, 36%27 percent of our respondents were CEOs and CMDs, 33 percent were business heads and40 percent were CIOs and IT Heads. Respondents by Designation Business CEOs, 27% Heads, 33% CIO/IT Head, 40% 2
  5. 5. Executive SummaryThis report takes a strategic view of innovation in Indian banking, with insights fromtop industry executives. We examine strategic innovation vis-à-vis incrementalinnovation and their relative importance to growth and efficiency. We assess thebarriers to innovation and evaluate the steps taken by banks to enhance theirinnovation agenda across the business. This study reveals the following aboutIndian banks:• They aim to be innovation leaders and look to establish best practices for new age banking. 56 percent of the respondents said their banks were aiming to lead innovation with respect to the local market as well as international best practices.• They are focusing on strategic and incremental innovation. 77 percent of the respondents said they were pursuing strategic and incremental innovation in equal measure.• They consider innovation extremely important for growth and efficiency. 88 percent felt innovation was critical for growth and 57 percent said innovation was extremely important for efficiency improvements.• They are increasing investments in innovation, with several banks in the process of instituting an independent function to co-ordinate the same. 83 percent said their banks were increasing investment on innovation and 25 percent said they were in the process of creating a separate department to coordinate innovation.• Technology-led innovation is perceived to have maximum impact on efficiency improvement and product delivery. 38 percent said IT was extremely important for innovation and 47 percent said it was very important.• Internet technologies, mobile technologies, Business Intelligence (BI) and analytics software along with web services are viewed as having a clear impact on innovation initiatives.• Innovation is the industry’s direct response to regulatory and compliance challenges. 58 percent said they were becoming more innovative in response to regulatory and compliance challenges. 3
  6. 6. Challenges for Indian Banks:View from the TopAlthough the banking sector is all set tofuel economic growth in the years to K.V.KAMATH CHAIRMAN, ICICI BANKcome, it must address multiple challengesat various levels to achieve desired levels “Innovation has been aof functional efficiency. 90 percent of critical element of therespondents affirm that the recruitment, transformation paradigm.development and retention of talent is a It is a continuous activity. We can’t saykey challenge. that we have innovated enough and rest. There is always a need to revisit what weFor many public sector banks, the have done. Contexts change, opportunitiesproblem lies in the ageing manpower change and we need to examine how wewhich needs to be replaced with equally can do things differently every time.”skilled personnel. While several Banksincluding State Bank of India (SBI) areon a recruitment spree, Canara Bank and For many other banks the humansmaller public sector banks like Vijaya resources issue is directly linked toBank and Corporation Bank, among increasing competition. Banks will continue to compete for quality business Top CEO Challenges and customers, financial resources and deposits in addition to physical resources such as branches and ATMs. Their challenge is to groom their staff so that they don’t merely survive, but thrive amidst the competitive pressure. While many private banks seem to haveothers, are impeded by a shortage of got the people equation right, most oftalent. At Canara Bank, for instance, them observed that nurturing humanstaff at various levels, recruited in capital was crucial. At ICICI Bank, thethe 1970s, will retire in 2009-2010.Replacing them suitably will be a largest in India’s private sector, theHerculean task. emphasis is on getting the skill-set mix 4
  7. 7. earn revenues. Needlessly to say, they ALBERT TAROU will be adversely impacted if customers, CMD, VIJAYA BANK with inadequate knowledge of these “When you deploy cutting products, incur losses, from investments. edge technology, human Hence, the challenge of managing the resources must be ensuing risks is of significant concern.” competent as well. It’s important that the says J.M.Garg, CMD, Corporation Bank. ageing work profile, especially at public In addition, banks must also address the sector banks, be continuously tuned and risk of doing business with companies complemented by fresh talent recruited having ambitions of multi-national directly from outside of the organization.” expansion. Innovation is the key to success in all these areas.right. “Our challenges will be in terms Raising capital in compliance with Baselof ramping up branch network we did II norms is a challenge for many banks. However, most CEOs we interviewednot have. Getting the skill set equation assured us that they had their strategyright in the branch context will also be perfected. While liquidity is flowing freelycritical.” says K.V. Kamath, Chairman,ICICI Bank. NEERAJ SWAROOP REGIONAL CHIEF EXECUTIVE,Post implementation of Basel II, risk INDIA AND SOUTH ASIA, STANDARD CHARTERED BANKmanagement is also perceived as a majorchallenge. 40 percent of our respondents “Risks must be managedfelt the need for robust risk management in a way that they allowsystems. Some of them noted that banks profit optimization without compromisingmust carefully navigate the path to on the longer-term sustainability ofmanaging new risks arising from the the business.”introduction of new products. “Today wesee that there are new products like the at present, it may become a cause forderivatives of commodities and futures. concern in the coming months if theBanks must address the challenge of Government of India borrows heavily asunderstanding these products and yet per expectations. “Various stimuli from 5
  8. 8. the government will adversely impactliquidity and the quality of credit.” YOGESH AGARWAL CMD, IDBI BANKcautions Jayarama Bhat, CMD,Karnataka Bank. “Upgrading skill sets to perform and deliver in thisIt has been almost a year since the environment would be arecession set in and the after-effects key challenge for banks. Retention of talentare clearly showing. In general, the would also be crucial.”quality of banking business has beenadversely impacted. Most banks we world-class customer services, adherencespoke to have started to closely monitor to KYC (Know Your Customer) andasset quality. “The challenge is to ensure AML (Anti Money Laundering) norms,that we maintain growth without improvement of channel productivity,compromising quality, because these cost control and maintenance ofare two sides of the same coin. It’s profitability margins.important to maintain the quality ofbusiness at high levels. Maintaining Respondents believe that adherence toasset quality would also be key.” says international standards of corporateM.D.Mallya, CMD, Bank of Baroda. governance, including those relatedOther business challenges cited by to transparency and disclosure willrespondents include the provision of be crucial. Scaling up technology architecture is also viewed as a major challenge by both public and private M.D.MALLYA CMD, BANK OF BARODA. sector banks. “As we expand reach and “The challenge is to ensure add services to our portfolio, scaling up that we maintain growth technology infrastructure to meet without compromising quality, the needs of the business becomes a key because these are two sides challenge.” says Sanjay Sharma, CEO of the same coin. It’s important to maintain the IDBI Intech, the IT arm of IDBI Bank. quality of business at high levels. Maintaining asset quality would also be key.” IDBI Bank is planning to double its number of branches over the next year. 6
  9. 9. For many public sector banks, with a friendlier with the spectrum of clientelediverse customer base spanning age that a public sector bank has, becausegroups, the challenge is to promote the it’s so wide and varied. We have farmersuse of technology-enabled products. “The who are not tech savvy and pensionersbiggest challenge is to make technology who draw Rs. 350/- a month. Both would like the bank to address their specific R.I.S. SIDHU needs. It’s essential they all reap the CIO AND CHIEF COMPLIANCE OFFICER, benefits of technology,” says R.I.S. Sidhu, PUNJAB NATIONAL BANK. CIO and Chief Compliance Officer, “The biggest challenge is to Punjab National Bank. make technology friendlier with the spectrum of clientele that a public As banks look to creatively overcome sector bank has, because it’s so wide and these challenges, they will benefit most varied. We have farmers who are not tech from those innovations that tap new savvy and pensioners who draw Rs. 350/- opportunities, optimize cost structures a month. Both would like the bank to address their specific needs. It’s essential they all reap and deliver the right product mix the benefits of technology.” to customers n 7
  10. 10. Innovation in the Contextof BankingWithin the business context, innovation ones to offer certain products andtranslates into efforts that result in a services.” points out Chanda Kochhar,product, service or process that helps CEO, ICICI Bank.organizations transform and grow. 3 Evolution of InnovationProducts in the banking industry are In the government regulated environmentmore often notional than physical, and of the 1970s and 1980s, every bank offeredrarely, if ever, protected by Intellectual the same products and services. It wasProperty (IP) rights. As a result, almost only in the late 1990s, when privateevery process, product, service and sector and foreign banks entered thedelivery channel can be replicated and fray that the wellsprings of innovationbettered by competing banks. With any were truly tapped. These banks pioneeredbanking innovation having a short shelf the use of technology to enhance processlife, there is very little advantage for efficiencies. Consequently, ATM networksthe first mover. were ushered into urban India in theSome innovations help banks improve late 1990s and the early part of thisinternal efficiencies, reduce costs and century. Innovations grew beyond the payment system. A plethora of loan CHANDA KOCHHAR products, with competitive interest rates CEO, ICICI BANK. and repayment schemes triggered the “Innovation helps create retail banking revolution. Many banks differentiation in the minds added incremental value to their products of customers, to whom we by throwing in additional services. For can be the first ones to offer certain products instance, some banks assisted their and services.” customers in finding and buying a home, in addition to financing the purchase. Usedfurther their business goals, while others car re-finance was another innovationpositively impact banking customers. conceived during this period.Banking innovation is both an enablerand a differentiator. “Innovation helps Banks also innovated on their deposits.create differentiation in the minds of Several allowed customers to earn highercustomers, to whom we can be the first interest on their savings by offering a 8
  11. 11. `sweep in’ facility whereby funds • Kotak Mahindra Bank allowsexceeding a pre-specified amount were customers to buy and sell mutualautomatically moved into a fixed deposit funds through its ATMaccount. Kotak Mahindra Bank went astep further by enabling excess funds in • IDBI Bank goes a step further, offeringcustomers’ accounts to be invested in a airline bookings through its ATMhigh-yielding liquid mutual fund. • HDFC Bank pioneered the mobileParadigm Shift Point of Sale (PoS) terminal which is slated to make the use of plastic forOver the years, technology and innovation transactions ubiquitoushave enabled banks to move from a`working hours/week days’ model to an • Standard Chartered Bank pioneered‘always-on 24x7’ framework. Some the concept of a single card that doublesexamples include: up as both credit and debit card• ICICI Bank’s 8 am to 8 pm banking in Innovations have not been restricted to many cities large private sector banks and foreign banks. Smaller public sector banks have• HDFC Bank’s 24x7 branch at Mumbai also leveraged their size, scale and areas International Airport of operation. Corporation Bank, one of the smallest in the public sector, allowsBanks have also taken services customers to remit income tax throughto customers’ doorsteps. Some its comparatively small ATM network.examples: Public sector banks have largely delivered innovation through their branches. Bank• SBI and ICICI Bank introduced mobile of India, for instance, has established ATMs in some cities solar powered branches in some remote• Kotak Mahindra Bank delivers money rural areas where power is scarce. to customers’ homes ICICI Bank was the first to launch a business correspondent model whereCustomer facing innovations are representatives provided banking to theaplenty. For instance: rural poor. Many of the public sector banks 9
  12. 12. we spoke to are emulating this model to New Channelspenetrate rural markets. A significant majority of respondentsBanks have innovated in the predicted that future innovation wouldcorporate space too. focus on channels and the delivery of new products over them. Most banks are• SBI took the lead in offering MIBOR betting big on Internet and more rates to top companies. Many banks recently on the mobile, as the delivery followed suit with similar offerings platform of the future. They point out that net transactions have shown an• ICICI Bank securitized Rs. 4.2 crores upward trend in the last couple of years for Bharatiya Samruddhi Finance for and see good potential ahead. The mobile crop production, thereby becoming the is a platform on which they expect to first bank in the world to securitize a deliver maximum innovation. “India is microfinance portfolio well known as the hub of innovation around the mobile space. These are• HDFC Bank launched a seamless CMS mostly process innovations where the Supply Chain System to connect to mobile industry has driven costs down its corporate customers running dramatically and thereby increased SAP and other ERP systems. With efficiencies and usage. This is going to this, customers were empowered to surpass the Internet as a preferred transact and manage their wholesale channel.” says Aniruddha Paul, Head- banking services across geographies Change Delivery, ING Vysya Bank. using a single platform Respondents from public sector banks believe that the mobile platform will• Standard Chartered Bank’s “kiosks” help them extend services to their extended virtual banking to customer rural customers and reach out to premises the unbanked n 10
  13. 13. Innovation StrategyA whopping 96 percent of our respondents systems and processes to enhancesaid that their banks had a clear strategy customer experience, while managingfor innovation. However, for a majority, risks and costs. HDFC Bank, anotherthis was an integral part of their business mature IT user, has a two-pronged 3strategy. They were of the opinion that strategy - expand network to capture newinnovation cannot be viewed in isolation, customers and more importantly, minebut in tandem with the overall business internal (branch banking) customers for incremental business. Do You Have a Strategy for Innovation? At ING Vysya, where the traditional client Yes, 96% base built over a period of 70 years is being No, 4% augmented by new customers, innovations are tailored for customer segments through a streamlined mechanism. The key elements of YES Bank’s strategystrategy. The rationale for the innovation for innovation include encouraging thestrategy factored in business imperatives spirit of professional entrepreneurshiplike competition, customer retention among employees. A knowledge-driventhrough better services and customer approach to financial solutions andacquisition through the launch of technology makes for quality service.innovative products. Rana Kapoor, the CEO and founder of the bank strongly believes that theseBanking innovation is driven by strategic will be the pillars of the bank’sconsiderations premised on both short and innovation engine.long term objectives. The more matureusers of IT among banks rely on advanced Meanwhile, Kotak Mahindra Bank isBusiness Intelligence (BI) tools to power focusing on internal innovation toinnovation. The strategy at Standard increase channel productivity.Chartered Bank, for instance, is tooptimally use Business Intelligence to Punjab National Bank, which has atrack customers’ evolving needs and nationwide network of over 5,000improve products and services. The bank branches, talks of creating 100,000 touchcontinually undertakes improvements of points spanning the urban, semi-urban 11
  14. 14. and rural markets. Their strategy Not all banks have a strategy outlinedentails deploying technology to penetrate specifically for innovation. However, theyunder-exploited market segments with understand that it is critical to growthmeaningful’ products. and efficiency. Their business strategies factor in the need to innovate bothAt Bank of Baroda, the top management inward-looking aspects such as processesplans to put in place innovation policies as and outward-looking elements such asan adjunct to their ongoing Business channels, products and customer service.Process Re-engineering (BPR) exercise. Technology with a Human FaceSmaller regional banks have innovationhigh on their agenda, as evident from the Public sector banks including Syndicatefollowing examples: Bank, Corporation Bank and Vijaya Bank are keen to deliver innovation powered by• Federal Bank is improving its technology, but with a human touch. They payment systems by enabling believe that the human element is crucial straight-through-processing of to customer retention. remittances Innovation Leadership and Next• Dhanalakshmi Bank is investing Practices heavily on IT to deliver a suite of new products and services We asked respondents whether the banks they represented aimed to emerge as• South Indian Bank, which brought innovation leaders relative to just the down the average age of its customers domestic market or international best from 51 to 39, is planning to unveil innovative schemes, including some Is Your Bank Aiming to be an Innovation Leader? targeted at students, under its `next Relative to the generation banking’ campaign local market, 44%• Lakshmi Vilas Bank is looking Relative to local market and to leverage tie-ups with larger international best practices, 56% banks to offer new services such as brokerage 12
  15. 15. practices as well. A majority of these new customers across the counter.banks have strong domestic operations ICICI Bank was the first to introduceand believe that Indian conditions this concept in international marketsdemand a distinct treatment. 44 percent where opening an account across theaimed to be innovation leaders in the counter was unheard of. Remittancesdomestic market, while 56 percent are another area where India hassought to lead innovation both locally created highly cost effective models,and in the global market. unknown in other parts of the world. “In which other country can you take“I would not say our best practices will a technology and apply it to a billionhave to be a mix of global and Indian. In people?” she questions,” It’s only herefact, we should go ahead and create that you can test things on a scalebest practices for the world to follow.” that is so large that you make yoursays Chanda Kochhar of ICICI Bank. products cost effective and then apply itShe cites the instance of ICICI Bank everywhere else.” nstarting the practice of giving a kit to 13
  16. 16. Strategic Vs. IncrementalInnovation organizational structure. The exercise resulted in the closure of 26 zonal offices and enabled faster decision making. State Bank of India 3 undertook a similar project as part of a larger restructuring exercise and reduced the number of its zonal offices Strategic Vs. Incremental Innovations 80% 70 % 60%Banks can approach innovation from a 50% 40%strategic or incremental perspective. 3 0% 20% 10%When a bank revises its business model 0% Strategicand sets in motion transformation Both strategic and incremental in equal measureresulting in competitive advantage andlarge-scale organizational impact, theinnovation is clearly strategic. But not • Recently, ICICI Bank moved fromall innovation need be as dramatic. an outsourcing model to anImproved processes, channels and in-house model to enhance cost andproducts are the basis for incremental, operational efficienciesyet highly effective innovation. The pastdecade has seen Indian banks innovate • Dhanalakshmi Bank is in the midststrategically as well as incrementally. of organization-wide technology transformation expected to bring inInstances of strategic transformation process efficiencies along withabound in the Indian banking industry, innovation in channels and productsas shown below: • Standard Chartered Bank introduced• Punjab National Bank hired Boston cards that double up as both debit and Consulting Group to review its credit cards 14
  17. 17. • Bank of Baroda undertook an the opinion that a series of incremental organization-wide Business Process innovation across multiple facets of Re-engineering exercise a bank’s business can amount to strategic innovation.Most banks we spoke to are lookingto innovate both strategically and Respondents expressed the view thatincrementally. 77 percent of respondents while strategic innovation was primarily aindicated that their banks were working top management prerogative, incrementalon strategic and incremental innovation innovation emerged mostly from lowerin equal measure, while 23 percent levels, particularly the customer-facingmaintained that strategic innovation was field force. They opined that incrementalon top of their agenda. innovation could have significant andTypically, public sector banks, regional positive, long term impact. “Strategicbanks and old generation private innovation looks great on paper. Butsector banks are focusing on strategic it’s the smaller, incremental innovationsinnovation. At these banks, incremental that can improve customer experienceinnovation often follows strategic which really counts.” says K. Ram Kumar,innovation. New generation private sector Executive Director, ICICI Bank. Abanks and foreign banks are working clear example is ICICI Bank’s focuson a mix of both strategic and incremental on innovation to reduce the IVR callinnovation. Some respondents are of hold time n 15
  18. 18. Innovation and Efficiency How Important is Innovation for Efficiency Improvements at your Bank? 4% 8% Somewhat Important Important 57% 31% Very Important Extremely Important felt that innovation was extremely important to achieve efficiency improvement, while 31 percent said it was very important.The banking industry is witnessingsignificant widening and deepening of Many of the banks we spoke to aremarkets and a corresponding increase leveraging IT for product and servicein the scale of activities. Business delivery and automating critical processesis increasingly going international; to enable straight-through-processing.therefore, it is crucial for banks to Some of them told us that they have putunderstand global business dynamics. in place process management systemsMany of the banks we spoke to are of for seamless execution of customerthe view that while product innovation transactions and risk mitigation. IDBIlends competitive advantage to an Bank carried out a comprehensive BPRorganization for a few months, process exercise recently. Now, the bank has ainnovation can do so for a significantly full-fledged BPR department drivinglonger period. process efficiencies.Innovation and Efficiency At the core of HDFC Bank’s efficiencyImprovements strategy are its quality initiatives,We asked the respondents to rate the which are expected to create customerimpact of innovation on future efficiency delight. One such process of collectingimprovement at the banks. 57 percent documents for new sales acquisition is 16
  19. 19. “First Time Right” (FTR). Focused enable online real-time tracking. Toolsmeasurement and management of FTR provide online MIS, enabling managersmetrics has enabled the bank to utilize to allocate resources optimally.sales capacity optimally. The bank has We also queried respondents on thealso invested significantly in technology approach adopted by their banksand other resources to support the towards innovation aimed at achievingquality initiatives. “This has helped cost reduction, operational processtremendously to reduce our unit cost of redesign and technology upgrade.operation despite increase in volumes”,states a spokesperson from the bank. On the cost reduction front, 47 percent ofAt Standard Chartered Bank, two respondents said the level of activity wascritical metrics tracked regularly are very high and 36 percent said it was fairlytransactional cost per unit and operations high. However, only 21 percent of thecost as a percentage of revenue. The bank respondents said the level of innovationhas invested in sophisticated productivity with respect to cost reduction was verymeasurement and tracking systems that high and 36 percent said it was fairly high. General Cost Reduction Exercises General Cost Reduction Exercises Level of Activity Level of Innovation 4% 6% 17% Low 21% High Not High 47% High Fairly High 33% Very High 36% Fairly High 36% Very High 17
  20. 20. On the operational process redesign front, 17 percent said the level of activity in theirbanks was very high and 65 percent said it was fairly high. Operational Process Redesign and Simplification Operational Process Redesign and Simplification Level of Activity level of Innovation 2% 8% Not High 17% 10% High 40% High Fairly High Fairly High Very High 58% Very High 65%43 percent of respondents said that the level of activity in core technology and systemsredesign or replacement was very high. 22 percent said that the level of innovation inthis area was very high. Core Technology & Systems Redesign Core Technology & Systems Redesign or Replacement Level of Activity or Replacement Level of Innovation 6% 6% 4% Low 8% Low 22% 13% Not High Not High 43% High 22% High Fairly High Fairly High 34% 42% Very High Very High6 percent of respondents said that the level of activity technology outsourcing was veryhigh and just 4 percent indicated that the level of innovation in technology outsourcingwas very high. Most of the banks believe that outsourcing is feasible only in limitedways and with respect to functions that are non-critical n Outsourcing of Activities Level of Activity Outsourcing of Activities Level of Innovation 6% 4% Low Low 23% 29% 27% Not High 29% Not High High High 14% Fairly High Fairly High 28% 20% 20% Very High Very High 18
  21. 21. Innovation for GrowthIn any competitive environment, customer was extremely important, 31 percentacquisition and growth are decidedly said it was very important, 8 percentpowered by innovation. By innovating, said it was important while only 4 percentcompanies challenge the status quo and said it was somewhat important. 3create new offerings that customers are Growth Driverswilling to purchase. Companies innovatewhen they find ways of reaching out to RBI estimates growth in the bankinguntapped markets and geographies. sector to be in the range of 18 to 20 percent Innovation & Growth 70% 60% 50% 57% 40% 30% 31% 20% 10% 4% 8% 8% 0% Somewhat Important Important Very Extremely Important ImportantEventually these innovations drive over the next year. According to Indiangrowth. The story is no different in the Banks’ Association’s vision document,banking sector. banking assets are expected to account for two-thirds of India’s GDP. Thus,We asked our respondents how important depending on their reach and strength,innovation was to them from a growth banks are focusing business energies onperspective. 57 percent indicated that it verticals such as: 19
  22. 22. have set up business verticals to provide best-in-class services and products to large corporate houses, MSME, agro- business and the personal banking segments.” says M.V.Nair, CMD, Union Bank of India. The bank is planning to leverage technology to create innovations aimed at Increasing delivery efficiency. Banks are looking to generate fee based income from M&A, loan syndication and para-banking activities such as insurance and mutual fund distribution. Bill collection and payment of services is one growth area where banks are planning• Infrastructure, construction and to innovate leveraging e-banking, ATM construction equipment and mobile banking channels.• Retail Bank of Baroda, for instance, is planning a series of product rollouts in this area.• Agriculture and rural business CMD M. D. Mallya sees retail business• Government as a major growth driver of both assetsBanks are reorganizing their business and liabilities. “On the liability side, Ito tap these segments. For instance, IDBI see an increase in customer base as retailBank has recently created customer- customers will provide us more savingsfocused verticals which, inter alia, cover and current accounts. On the assetspersonal banking, SME, agri-business side, we have a number of products thatand infrastructure to tap the growth could be utilized for cross selling, whetherpotential in these sectors. The bank is it’s a housing loan, vehicle loan,innovating to provide customized, focused educational loan or a trader’s loan.and efficient services to these segments. There are opportunities to innovateAnother bank considering vertical focused here,” he says. Mallya is also expectinginnovation is Union Bank of India. “We corporate business to drive volumes 20
  23. 23. and grow the overall business. He believes Customers are presented with biometricthat it could also facilitate cross-sales cards that act as passbooks. They arein terms of employee payroll accounts offered overdraft facilities ranging fromand so on. Bank of Baroda is also reviving Rs.500 to Rs.1,500. Transactions area subsidiary for merchant-based lending supported online between 10 a.m. and 6and syndication activities. p.m. Customers are also given credit cards. The bank offers both life andSome banks believe that financial non-life insurance products to ruralinclusion and micro-banking are the customers. In addition, they trainnext big opportunities and expect these prospects for employment within theto significantly contribute to their organization. The bank has alreadygrowth in the years to come. Corporation collected Rs.25 crores in deposits and isBank has put in place a business looking to increase it manifold this year.correspondent model spanning 400 “The cost of servicing is high. But wevillages. According to CMD, J.M.Garg, are getting deposits at 3.5 percent andthe bank is planning to cover more than lending at 9 percent. It is a 20 to 302,000 villages this year alone. Corporation year game plan and there is immenseBank’s business correspondents are scope for innovation.” says Garg nmostly grocers or retired teachers. 21
  24. 24. Products, CustomerExperience and CollaborationIndian banks are realizing that Technology transformation at banks,continuing focus on only driving-up sales undertaken with a view to positivelyin an attempt to get more customers, can impact its innovation agenda andbe counterproductive. They have long efficiencies, is viewed as a complex and 3since realized the value of investing challenging program. More thanresources to retain and thus grow revenue plugging a new application into thefrom customers. We find that banks are bank’s IT infrastructure, respondentslooking at creative means of packaging were of the view that it encompasses aand delivering their products to set host of services, from consulting tothemselves apart from their rivals as well infrastructure management to BPO.as to stay a step ahead on the path toeffective and meaningful differentiation.In fact, the drive to leverage technology Product Bundling or Packagingfor connectivity and information, is alsogaining impetus among Indian banks. 13% 22% Not Important Somewhat Important 27% Product Technology Features Very Important 20% Extremely Important 2% 7% 29% Not Important Somewhat Important 62% Very Important Extremely Important 22 percent of the participants felt that product bundling and packaging are extremely important components on the innovation agenda while 27 percentOur study attempted to gauge were of the opinion that these arerespondents’ perception of factors drivinginnovation impacting products, channels somewhat important.and customer experience. For instance, a savings account that62 percent of our respondents believe doubles up as a fixed deposit or athat product technology features are savings account linked to mutualvery important for innovation while only funds, like the Kotak Mahindra7 percent were of the view that it was ‘sweep in’ account, holds an attractiveextremely important. proposition for customers. 22
  25. 25. Banking customers are wide and varied, constituent of a broad consumer segment.and so are their financial needs. Several Consider a home loan customer with arespondents were of the view that clean track record, forced to default onbanks must look to further develop its account of a job loss. The bank must treatproducts and services to specifically the customer with greater lenienceserve these differentiated requirements. versus a habitual defaulter. If the bankCustom bundling products for different were to propose a temporary waiver or asegments, they opined, was one way of restructuring of the loan, it would notdoing this. A significant section of only secure the customers loyalty butrespondents further qualified their also reduce the risk of future non-response by stating that it is easier to sell payment, as well.more products to an existing customer Product Personalizationthan go about acquiring a new one. Theability to introduce small variations byway of bundling or preferential offers, 13% Not Important 31% 9% Somewhat Importantthey felt, increases their ability to cater Very Importantto a larger cross-section of customers, 47% Extremely Importantwith a smaller core set of offerings.Personalization was rated as one ofthe most important factors while 28 percent of the survey participantsinnovating on products. 31 percent of said innovation in product pricing wasthe respondents said it was extremely extremely important and 43 percent saidimportant and 47 percent noted that it it was v ery important.was very important. Product PricingThere seems to be greater than everbefore emphasis on taking 6% Not Importantpersonalization to the next level and 28% 23% Somewhat Important Very Importantunderstanding each customer Extremely Important 43%qualitatively and individually; and notviewing him as an undifferentiated 23
  26. 26. Interesting views were expressed by When Innovating with Customer Relationship orrespondents, in the arena of pricing Customer Experience, How Important are the Following?related innovations. One initiative thatis likely to catch the imagination of Technology featuresbankers, is the move to develop 28% 30% Staff capabilitieschannel-preferential pricing that is Process desugn 42%segment-specific as well. For instance,a Gen-Y customer who prefers to useInternet banking would pay a small technical collaboration with companiespremium to use a branch service, while from other industries was morea retired senior citizen would be important. Very few believed thatcharged a small premium for a mobile collaboration with competitors would bebanking transaction. important from an innovation standpointWe also surveyed respondents on factors Banks are under unprecedented pressurethat influence customer experience. 42 today – from customers demanding morepercent of the respondents opined for less, from regulators expecting tighterthat staff capabilities were most compliance and from competitors vyingimportant while innovating on customer for market share. In order to stay on top ofexperience. 30 percent felt technology their game, respondents were unanimousfeatures were of utmost importance in their opinion that there is need to takewith respect to customer experience.Almost a similar number accorded Will Partnerships and Collaborations be more or less Important in the Future for Innovationprocess design top priority. at your Bank? With competitorsPartnership and collaboration also play 11% 8% With companies from other industries: for distribution partnershipsa critical role in innovation at banks. 33 26% With companies from other 33% industries: for combiningpercent of our respondents said that their capabilities and technologies 22% With major supplierssupplier partnerships played a critical With small, innovative companiesrole in their innovation programs. 26percent said distribution partnershipswith companies from other industries innovative action, in one form or thewere critical. 22 percent of them felt other, and make it count. 24
  27. 27. By leveraging the collective wisdom, investment came next, followed bytechniques and technology at their management focus on other prioritiesdisposal, banks are innovating to emerge and insufficiency of innovative ideas.winners, and create a brighter future. Bottlenecks in IT development and regulatory compliance mandates wereBarriers to Innovation not seen as barriers by most respondents.We asked respondents to rate 11 factors Respondents were unanimous thatthat could act as barriers to innovation. the regulatory compliance frameworkLack of coordination across departments presented little challenge and did notand management/ employee attitude hinder innovation, in general. Whenwere identified as the biggest barriers we asked them whether they wereto innovation. Lack of senior executive becoming more or less innovative insupport came second followed by response to the regulatory framework,companies’ risk aversion and inflexible 58 percent said that were becomingIT systems. Lack of incentives to more innovative, while the rest sawreward innovation among employees no correlation between compliancewas seen as less of a barrier. Lack of and innovation. Factors that are Most Likely to Act as Barriers to Innovation16%14%12%10% 8% 6% 4% 2% 0% Lack of senior Lack of Lack of co- Insufficient Management Inflexible IT Bottlenecks in Risk aversion Regulatory and Management Lack of executive investment ordination innovative and employee systems IT of the compliance focus on other incentive support across ideas attitudes and development company requirements priorities schemes and departments behaviour compensating benefits for innovation 25
  28. 28. Respondents were largely univocal in It is also important, according to severalstating that bringing in the innovation respondents, that successful innovationculture is not very different from be defined by the right parameters.making an organizational thought-shift. Although Return On Investment (ROI)For any organization to create a culture is important, it cannot be the onlyof innovation, they said, change must measure of success, they clarified. Somestart at the top. Leadership, they opined, examples of such innovation, theymust create an environment that not mentioned, impacted brand equity oronly rewards and nurtures innovation even customer advocacy, without havingbut encourages its people to feel ‘safe’ a direct impact on the immediate ROI nto innovate. 26
  29. 29. The Role of IT in Innovation in processes, product delivery, cost optimization or organizational agility, IT is clearly playing the enabling role. The Importance of IT We asked our respondents how important IT was for innovation within their organizations. 38 percent said that it was Importance of IT for innovation 5 0% 40% 47% 30% 38% 20 %Information technology has driven almost 1 0% 15% 3 0%every innovation rolled out by banks in Important Very Importantthe past decade. Technology has led to Extremely Importantthe deployment of core banking systems, extremely important. A majority of thephenomenally improving efficiencies. It respondents who said so were from bankshas also driven down transaction costs that had either rolled out core bankingand provided impetus to the emergence across all branches or were in the processof new channels like Internet banking of doing so. 47 percent of the respondents,and more recently, mobile banking. A mostly from banks that were relativelynumber of new products deliveredthrough these channels are technology- Maximum Impact of IT from andriven as well. Technology has empowered Innovation Standpoint Customerbanks to access astronomical amounts Experience, 16% Cost Optimization, 18%of data, playing a critical role in the Organizational Agility, 18%creation and deployment of knowledgesystems that predict customer behavior Process Innovation andand preferences and take banking to Delivery, 22% Process Innovation, 26%the next level. Whether it is innovation 27
  30. 30. advanced users of IT, felt that IT was v the respondents said that IT impactedery important for innovation. customer experience significantly.We also asked them where IT could Technologies Impacting Innovationcreate maximum impact within their Mobile and Internet were rated as thebanks. Process innovation topped the list top technologies driving innovation bywith 26 percent saying that the impact 33 percent of the respondents. Businessof IT was most evident while improving Intelligence tools were next with 24process efficiencies. 22 percent of our percent of the respondents saying thatrespondents felt that IT revolutionized these would play a major role in bankingproduct innovation and delivery. 18 innovation. Most of the respondentspercent were of the opinion that IT who chose Business Intelligence (BI) werehad the maximum impact on cost from banks that had recently embarkedoptimization and an equal number upon or completed data warehousingbelieved it enhanced organizational projects. Virtualization took the nextagility. Surprisingly, only 16 percent of What Technologies will Specifically Impact Innovation in the Banking Sector? Business Intelligence and Analytical Software, 24% Software-as-a-Service, 4% VoIP and Communication Cloud Computing, 3% Technologies, 6% Virtualization, 12% Mobile and Internet Technologies, 33% Web Service/SOA, 18% 28
  31. 31. place with 12 percent of the respondents incremental benefits when deployed withsaying that it would have considerable other powerful technologies. Mostimpact on innovation related to respondents preferred traditionalresource optimization. Web services software licensing models to Software-as-and SOA followed with 18 percent of a-Service (SaaS) and felt the latter wasthe respondents identifying these as not yet mature enough to significantlytechnologies that could power innovation. impact innovation. A few of theThe surprise, however, was VoIP respondents were aware of the concept ofand communication technology. Most cloud computing and its possible relevancepeople believe that this could provide to innovation in the banking sector n 29
  32. 32. How Banks Can BecomeMore InnovativeIf innovation is to drive efficiency, growth Is Innovation a Top Priority forand differentiation, banks must find the Banks?means to cultivate this spirit across theorganization. At the strategic level, We asked our respondents whetherbanks can make innovation a top priority the banks they represented hadand roll out a clear plan in tandem with made innovation a top priority. Anthe overall business objectives of the overwhelming 88 percent responded inorganization. They must earmark a the affirmative. Only 12 percent of thebudget for innovation. They can go a step respondents said their banks were yetfurther by creating a separate department to elevate innovation to the top of thewhich solely co-ordinates and supports priority list.innovation efforts across all others.Banks must institute systems to ensure Making Innovation a Top Strategic Prioritythat the innovation vision percolates toemployees at all levels. They must initiate No, 12%training programs to sensitize staff tocustomer needs and nurture innovation Yes, 88%that not only results in improved Yesefficiency, but enhanced customer Noexperience, loyalty and retention.Banks that truly consider innovationas a key differentiator must reward Have Banks Charted a Clearinnovative ideas. If innovation is to drive Innovation Strategy?growth and profitability, it must be thecornerstone of their business strategy. When we asked the banks if they had a clear innovation strategy, 96 percentInterviews with our respondents revealed responded in the affirmative. However,that banks in India are increasingly most qualified their answer with therealizing the importance of innovation observation that their organizations’in their efforts to gain mindshare, innovation initiatives were a by-product ofmarket share, revenues and profits. the overall business strategy. 30
  33. 33. Setting Out a Clear Innovation Strategy 96% 100% 75% 80 % 60% 40% 20% 4% 0% Yes NoIs Investment in Innovation Is there a Separate DepartmentIncreasing? Coordinating Innovation?83 percent of the respondents said 25 percent of the respondents said thatthey were increasing investment in their banks were in the process of creating a department responsible forinnovation while only 17 percent said innovation. 75 percent were of thethat their investment was unchanged. view that innovation was a shared responsibility across departments. Increasing Investment in Innovation Bank of Baroda, YES Bank, Union Bank of India and Lakshmi Vilas Bank No, 17% are among those considering creating an independent department for innovation. Yes, 83% Many banks have committees or task Yes forces that drive innovation agendas. Lakshmi Vilas Bank, for instance No has a board level committee that spearheads innovation. 31
  34. 34. Creating a Department Responsible for Driving Innovation 80% 60% 75% 40% 25% 20% 0% Yes NoAre there Idea Generation andScreening Procedures? Are Banks Providing Incentives for Innovative Employees?90 percent of the respondents saidthat they had already set up or were in 92 percent of the respondents said theythe process of setting up idea generation had some kind of incentive scheme toand screening procedures with respect recognize employee efforts, whether forto innovation. innovation or performance. These are Setting up Better Idea Generation Providing Incentives for Employees and Screening Procedures to be more Innovative No, 10% No, 8% Yes, 90% Yes, 92% Yes Yes No No 32
  35. 35. given as cash incentives in some cases, specific training could be provided to makein kind in others, and as recognition or employees more creative or innovative.mementoes in the rest. Are Banks Investing in MoreAre Banks Increasing Employee Flexible IT Systems?Training on Innovation?59 percent of the respondents said they 87 percent of the respondents saidwere increasing employee training in that flexible IT systems helped innovationgeneral and were also looking to increase and their banks were investing in them.training to help them come up with The rest said that they could innovateinnovative ideas. The rest said that no despite inflexible IT systems n Increasing Employee Training on Innovation Investing in More Flexible IT Systems and Creativity No, 41% No, 13% Yes, 87% Yes Yes, 59% Yes No No 33
  36. 36. ConclusionThe Indian banking sector is poised to welcome innovation from across avenues in the yearsto come. Private sector banks and foreign banks, which are advanced users of technology,will deploy advanced tools to mine customer data and build a host of innovations into theirproducts and services. They will also be looking to scale their channel and branch networks,while devising new means of driving down transaction costs. Most public sector bankscurrently deliver their innovations through branches as opposed to private sector banksthat deploy them over e-channels like ATMs and the Internet. Moving forward, public sectorbanks, at least the bigger ones, will roll out large scale e-channels. Regional and othersmaller banks will customize their products and services for specific regional demographies.Banks in India realize that innovation across all fronts is critical to their success in a marketplace that is getting increasingly competitive. But, as this study reveals, there is a lot morebanks can do to make innovation deliver greater value to their business in the long run.• Banks that have a strong innovation component factored into their business strategy will emerge at the head of the pack. Their innovation agenda must take a lead from a judicious mix of both local and international best practices.• The right mix of incremental and strategic innovation is crucial for banks. While employees across cadres can add value by engaging in incremental innovation, significant management investments must essentially drive the fruition of strategic innovation.• Banks will benefit from augmenting their own innovation efforts to take customer experience to the next level, by leveraging strategic partnerships and collaborations, for the purpose.• The innovation culture at the bank must be nurtured carefully and continuously, through adequate training initiatives and with sustained efforts to create an `innovation-safe milieu.• Innovation is a direct outcome of people directing energies to think innovatively. Management at banks must focus on making innovation an organizational priority and ensure that the agenda percolates down the ranks, without dilution.In summary, a highly focused and objective approach to innovation will help banks honetheir operational efficiencies, deliver better products, take customer experience to the nextlevel and eventually drive growth and profits. 34
  37. 37. About UsThe Economic Times, launched in 1961, is India’s largest financial daily newspaper and theworlds second largest financial daily, with a circulation of over 620,000 copies. It ispublished by Indias leading media group Bennett, Coleman & Co Ltd, which also publishesThe Times of India, India’s largest English daily. It has also launched a 24 hour businesschannel - ET NOW.Infosys (NASDAQ: INFY) defines, designs and delivers IT-enabled business solutions thathelp Global 2000 companies win in a flat world. These solutions focus on providing strategicdifferentiation and operational superiority to clients. With Infosys, clients are assured of atransparent business partner, world-class processes, speed of execution and the power tostretch their IT budget by leveraging the Global Delivery Model that Infosys pioneered.Infosys has over 100,000 employees and operates globally from 21 countries. Infosys ispart of the NASDAQ-100 Index.Finacle™ from Infosys partners with banks to power-up their innovation agenda, enablingthem to differentiate their products and service, enhance customer experience and achievegreater operational efficiency. Finacle™ solutions address the core banking, wealthmanagement, CRM, Islamic banking and treasury requirements of retail, corporate anduniversal banks worldwide. Finacle™ solutions also empower banks with multiplesales,service and marketing channels including e-banking, mobile banking and callcenters. These offerings make Finacle™ a strong innovation-facilitator enabling banks toaccelerate growth, while maximizing value from their large scale business transformation.Finacle is the chosen solution in over 116 banks across 62 countries. 35

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